Written by Kyle Flischel on August 30, 2022 in Uncategorized

Primary Residence Gain Exclusion

Your home is your pride and joy, and you earn capital gains when it appreciates. This is why many people buy a home versus renting. When you sell your home, the IRS wants its share of the profits earned. But, if the home is your primary residence, meaning you lived there full-time, you may be able to exclude some of your earnings from your taxable income using the primary residence gain exclusion.

What is the Primary Residence Gain Exclusion?

If you qualify, you may exclude $250,000 of your home’s capital gains if you’re single, and $500,000 if you’re married and filing jointly. You calculate your gain by deducting the following from the sales price:

  • Your tax basis. Your tax basis is the price you paid for the home plus closing costs and the cost of any major improvements, minus depreciation and any insurance payments. It’s important to remember that depreciation is never eligible for the primary residence exclusion and you will always pay tax on the gain up to the amount of depreciation taken.
  • Any seller’s costs you incur, such as real estate agent commissions, escrow, title, administrative, or inspection fees.
  • Any closing costs you pay selling the home, such as your part of the real estate taxes.

Who Qualifies for the Exclusion?

To qualify for the primary residence gain exclusion, you must meet the following guidelines:

  • 2-in-5-Year Rule – You must have lived in the home for at least two of the last five years. They don’t have to be consecutive, though. You may be eligible if you have lived in the home for at least 730 days in the last two years. If you’re married, both spouses must have lived in the house for two of the previous five years.
  • No exclusions in the last two years – You can’t use the primary residence exclusion more than once in two years. If you used it on another property you owned in the last two years, you could not use it again in that period.

Exceptions to the Primary Gain Exclusion Rules

If you don’t meet the residency requirements but meet any of the following, you may be eligible for an exception:

  • Your job relocated you, and you had to sell your home.
  • You had to move for health-related reasons, and/or your doctor recommended it.
  • There were unforeseen circumstances in your life, such as divorce or unexpected death.

If you qualify, you may take a prorated amount of the deduction. In other words, you wouldn’t get the full two-year deduction but the percentage of the time you lived in the home in the last two years.

Final Thoughts

The primary residence gain exclusion can help lower your tax liability. There are even ways to turn your investment property into a primary residence, so you get the exclusion if you aren’t selling your actual residence in the next two years.

To learn more about the exclusion and to determine how to qualify, contact Murtha & Murtha CPAs today. We’ll help you understand the exclusion and how it affects your tax liability when selling your home to maximize your profits.

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